The article is designed to get a better understanding about the concept of `Beta', which is very popular among the investors and the stock market s. Sixty five stocks belonging to various industries, trading on the Bombay Stock Exchange (BSE) are selected at random and their prices are observed at quarterly intervals from January 1, 2002 to October 1, 2004 for calculating their return values. Bombay Sensitive Index (BSE Sensex) is used as the benchmark index and the Sensex points for the same period are used to calculate the respective market returns.
Beta values for the securities, grouped industry-wise, are calculated and their implications are discussed. The values of `Beta' for these stocks are used to plot Security Market Line (SML) using Capital Asset Pricing Model (CAPM). The results are discussed highlighting how they can be used to make investment decisions. Beta (b) is usually described as a measure of volatility, the degree to which a stock price fluctuates in relation to the overall market. It compares the percentage change in the price of a security to the percentage change in the value of the market, based on a market index, taken over a period of time.
Every portfolio has two types of risks embedded in it:Diversifiable Risk or Non-Systematic Risk, which is specific to a firm (Examples: Business risk, liquidity risk, insolvency risk, risk of a strike at a firm, etc.). Everyone is aware that risk is associated with a reward; higher the risk, greater the return. As far as an investment portfolio is concerned, as the risk is broken into diversifiable and non-diversifiable portions, the market will not reward an investor for holding diversifiable risk.
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